July 28, 1998


by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—More competition: that’s what Congress declared they wanted when they passed the comprehensive Telecommunications Act of 1996. Even back then, the Internet was one of the most volatile and competitive of service industries, a flourishing menagerie of grass-roots idealists and drop-out techies. But now its future seems to rest on several regulatory battles surrounding the Telecommunications Act—and on how well service providers can leap up the salmon ladder to the next level of high-speed access.

First, the FCC published a notice in January concerning a proceeding called Computer III, which (as the number III indicates) is part of a series of rulings going back many years about the regulation of data services like the Internet. The thrust of the latest FCC suggestion is that Internet service providers be treated like telephone companies in their access to existing telephone equipment.

In particular, the ISPs would find themselves in a much better position to offer technologically advanced services because they could put their equipment right into telephone companies’ central offices, without being forced to go through the regulatory channels that encumber telephone companies or pay the burdensome charges that telephone companies pay.

Second, a number of Bell companies asked the FCC for the right to enter the long-distance market, which the FCC was withholding but dangling before them as a prize for promoting competition in their near-monopoly local markets. Part of the Bell companies’ petition requested the right to build new high-speed equipment without being forced to resell it. (The Telecommunications Act required them to resell parts of the telephone network to competitors.) Many ISP owners fear that, if the FCC approves the petition, the Bells will go on to dominate Internet service and slam the door on competing ISPs trying to offer the same new options.

Finally, a key provision of the Telecommunications Act received a blow in the solar plexus when a judge ruled in favor of several Bell companies who asked him to overturn special provisions restricting the Bells’ entry into long distance services. If the Supreme Court upholds this surprise ruling, the petition before the FCC will be moot—there will be no further barriers to Bells maintaining a monopoly on local service while they clip off pieces of the enormous long-distance market.

Standing out amidst all this swirl of legal wrangling is the next exciting technological development in data service: Asymmetric Digital Subscriber Line, a way of running high-speed Internet access over an ordinary old-fashioned telephone. In a recently developed form called splitterless ADSL, the service seems to solve (at least in some areas) what engineers have called the “last mile” problem.

Without requiring the expensive visit that’s needed to install cable TV or ISDN (an older telephone data service), splitterless ADSL turns a residential phone line into a conduit that can receive data at up to 1.5 Megabits a second, at least in theory. That should be enough to receive crude real-time video, and far more than is needed for extremely comfortable Web surfing.

ADSL does not solve all the problems of high-speed networking. Since it uses extremely high frequencies, it requires very clean phone lines. Some users’ phone lines are ready for it, some can be improved, and some are beyond hope. Furthermore, some users are too far from the telephone company’s office.

And ADSL is fast only on download; that’s what the word “asymmetric” refers to. It’s not appropriate if you want to send a large file from your end, offer a Web server, or do video teleconferencing—all applications that call for high bandwidth on the upload. So as promising as it is for the moment, splitterless ADSL is probably just a way station on the road to high-speed access.

But it could also be a choke point on that road. The local telephone companies want to get into the Internet service business. Their role vis-a-vis the ISPs—where the telco is both the supplier of the wire and a competitor—is fraught with danger.

ISPs trying to offer high-speed access have reported innumerable barriers, ranging from long delays in getting the telcos to install the ISP’s end of ADSL to seeing an ISP’s customer automatically “slammed” over to the telco’s service. Numerous complaints have been filed with public utility commissions; in some states ADSL has been held up until the commission can ensure competition.

And now comes the Bells’ petition before the FCC, named the “706 proceeding” after the section of the Telecommunications Act on which the Bells base their argument. Just as the proceeding scares long-distance companies (because it would eliminate the requirement for the Bells to open the local telephone market) it scares ISPs who think their road to the future would be rendered impenetrable.

According to a spokesperson I talked to at one of the Bell companies that filed, they have no beef with allowing ISPs to do what they now do: hook up to the telephone company and offer high-speed Internet access over the telephone company’s ADSL line. The only restriction on ADSL that the spokesperson anticipates is the right to upgrade a customer’s line to ADSL without reselling the line to an ISP or a competing telephone company.

In general, the Bells fear that the FCC will force them to resell elements of the telephone network so cheaply that they will lose money while their competitors gain. They also think they should have the right to offer a full range of services (voice, video, data) just like Sprint or the AT&T/TCI lash-up or the relatively new but eye-catching entrant into the networking market, Qwest.

Even so, a Bell that is freed from the need to open its local markets is more likely than ever to raise the barriers that have frustrated ISPs. And some ISPs want the right to resell the phone companies’ ADSL lines. Sue Ashdown, a manager of a Salt Lake City ISP, reports that the phone company filed a notice before the Utah utility commission claiming that it planned to resell its ADSL lines—why then is it so eager to get the FCC to relieve it from the need for resale?

For ISPs, entry into this new business is a big risk. New equipment must be bought, and the twisty turns over which the Bell companies provide ADSL service must be negotiated. But the rewards are big too: ISPs can charge more per customer because service is faster, while they keep less equipment on their own side.

Bets have been placed, and everyone is waiting for the regulatory and technological roulette wheels to turns. Some engineers say it doesn’t matter whether ISPs bet on the red or the black, because the little ball will land on the zero. These pessimists believe that small ISPs will be forced out of the market (a prediction made many times over the past few years) either because they won’t be able to charge enough to cover their technological investment or because the Bells will find a way to cannibalize their customer base. It may take years to find out.

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